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Daily Newsletter, Tuesday, 03/19/2002

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Tuesday 03-19-2002
Copyright 2001, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
03-19-2002 High Low Volume Advance/Decline
DJIA 10635.25 + 57.50 10673.10 10577.48 1.24 bln 1707/1421
NASDAQ 1880.87 + 3.81 1891.51 1873.17 1.35 bln 1827/1710
S&P 100 592.09 + 2.46 594.02 589.62 Totals 3534/3131
S&P 500 1170.29 + 4.74 1173.94 1165.55
RUS 2000 504.73 + 1.93 504.97 502.56
DJ TRANS 2930.64 - 17.25 2951.06 2908.22
VIX 20.35 - 0.40 21.38 20.21
VXN 38.99 + 0.24 40.01 37.77
TRIN .85
PUT/CALL 0.65
************************************************************
No Change Yet..
Who is on first? It appears that nobody knows. Greenspan and
company changed the bias to neutral but stressed that real
demand over the next several quarters is still uncertain.
Meanwhile Merrill Lynch and Saloman Smith Barney see first
quarter growth exploding at between +5% and +6%. Somebody is
wrong. Greenspan is becoming increasingly optimistic as to the
strength of the economic recovery but if he thought the first
quarter was going to post a 6% growth rate the decision today
would have been entirely different.
The major area of discussion appears to be growing demand or
the lack of it. Many analysts claim the current economic
rebound is being powered solely by a rebuilding of inventory
levels and not increased demand. The FOMC called it a "marked
swing in inventory investment which was expanding at a significant
pace." Considering how low the inventory levels had fallen while
corporations weathered the recession it is not surprising that
the "stocking" orders are large. Unfortunately those same inventory
levels are now rising rapidly which indicates there is no buying
on the retail side. That lack of buying is the fly in the ointment.
Still the FOMC is hedging their bets and already telegraphing
their intent to raise rates in the near future. The key word in
the FOMC announcement is "accommodative". The statement said
"although the stance of monetary policy is currently accommodative..."
which means in English "we think the rates are too low for the
current circumstances." However, after barely escaping with any
hair left on his head after the economic crash Greenspan is not
likely to rush back into an aggressive rate hike policy anytime
soon. There is no inflation pressure and no signs of a long term
recovery. Either way the FED should stay on the sidelines which
they did today. The next meeting is May-7th and that is the
meeting which could cause investors problems. It is also right
after the majority of earnings for this cycle. Mark that on your
calendar.
As evidence of the strengthening economy the semiconductor book
to bill numbers announced after the bell showed a +10% growth
from January to February. The book-to-bill ratio rose from .81
to .87 which means $87 of new orders were received for every $100
of revenue recognized. This "recognized" label was changed from
"orders shipped" after problems arose with channel stuffing and
orders refused during the recession. To recognize revenue the
customer must accept the order and take delivery. The brightest
outlook is in the equipment makers stocks. Chip equipment makers
sold $28 billion of equipment in 2001. With newer, smaller, thinner,
faster and cheaper chips the continuing trend the equipment makers
are due to sell an entirely new wave of equipment. Intel just
announced a move to the .09 micron process for the next generation
of processors which make much of the old equipment obsolete.
The industry is reporting a dwindling inventory of chips and a
sharp upturn in demand from China. Some analysts estimate that
orders for chip equipment could rise by +17% this year which
would equate to nearly $33 billion in orders. This should be
very bullish to the semiconductor equipment stocks but may not
impact the chipmakers themselves. Ordering new equipment may
be bullish but if orders for the chips themselves do not increase
then earnings will continue to suffer.
Did you vote? Millions did and according to HWP CEO, Carly Fiorina,
the merger is a go. While she said it was still too early to tell
for sure she felt from the number of institutions on their side
at the close of voting gave them the win. Dissident Walter Hewlett
insisted the vote was still too close too call. It will be a
couple weeks before the official vote tally is released and the
verbal battle ends. HWP dropped to $18.80 on the news and CPQ
rose to $11.00.
In other tech news shares of Red Hat fell in after hours after
saying that sales were slowing. The Linux system maker is finding
it tough to compete and is losing market share to other vendors.
Mercury Computer dropped nearly -$6 after warning that earnings
would fall to only .05 to .12 cents from analysts estimates of
$.24 cents. The company cited delays in shipments on defense
contracts and a delay in recognizing revenue on those shipments.
Not all the news was bad with Jabil Circuit gaining nearly $1 on
earnings that beat the street and comments that they saw continued
growth ahead.
The major indexes reacted to the FOMC news in typical fashion.
They began the day with an upward bias and then crashed when the
announcement was made. It never ceases to amaze me when the FOMC
does exactly what analysts expected but the Dow trades in an
exaggerated range at the announcement. The Dow dropped from 10664
to 10597 in the seven minutes following the news but rallied to
close well over 10600 at 10635. Exactly on resistance again! For
the bulls this is a strong signal since this represents the highest
close since June-22nd last year. Every day that the index trades
in this area, or in the case of Tuesday, spent several hours well
over the 10635 area, the resistance is slowly eroding.
The S&P also dropped sharply after the announcement but recovered
to close very near resistance at 1175. When these resistance levels
are tested over and over again they will eventually produce a major
move in one direction. The war between buyers and sellers is being
fought and the ranges are becoming smaller and higher. Still, even
with the post announcement volatility the VIX closed at another
relative low at 20.35. I received several emails reminding me that
the VIX can trade below 20 for some period of time without a market
meltdown as in 1995. I agree. There is no magic number that instantly
sets off a panic selling binge but there is a correlation between low
VIX numbers and eventual sell offs. Selling occurs when there is nobody
left to buy. Everybody who has money has already bought and everyone
is waiting for the markets to rise. This causes complacency and the
eventual market drop.
If everyone of our readers had $1,000 each on July 1st of last year
and they were instructed to invest it (not trade it) when they felt
the markets offered the best chance of a decent return, how many
would still be holding their money? Everyone thought the drop after
9/11 was overdone and represented a tremendous buying opportunity.
Doubtless, many would have invested then. As the markets rallied
into late December many more would have taken the plunge not wanting
to be left behind. Those that felt the market was already overvalued
in early January would probably have bought the dip back to the Dow
9600 level at the end of January. There would likely be very few
still holding money today as the Dow/S&P are struggling to break
that overhead resistance dating back to late spring of 2001. Now
you see the problem.
Everybody is already invested, or at least the majority of the buy
and hold community. The volume is slowing as conviction wanes. The
next opportunity to convince the remaining holdouts will come in
the April earnings period. If they are convinced then we could make
a new leg up. If they are not then we are doomed to slide into summer
as those investors who bought the 9/11 dip and the February dip decide
to take profits. The VIX is very low because nearly everyone has
already voted in favor of a rally. When storm clouds appear over
the markets the VIX will climb as investors take steps to protect
themselves against a drop either by selling, buying puts or setting
tighter stops. With good economic news appearing every day why do
you think the markets are struggling to break this resistance? Is
it because there are few investors with money left to spend?
Despite the VIX comments above there could still be several days of
positive movement in our future. The end of the quarter is coming
and many fund managers are still sitting on cash they did not want
to invest until the next pullback. With no drop in site and positive
news every day they may be forced to spend it to dress up their
statements. The competition for fund dollars this year will be
intense as the non-performers from last year are dropped in favor
of a new horse for the next bull market. Managers will not be able
to entice cash without showing a promising stable of thoroughbreds.
They are buying every dip but the dips are becoming shallower.
Should we get a breakout over 10635/1175 there could be some serious
buying and short covering. Regardless of what we think may happen
we need to keep those stops in place and our fingers crossed. The
earnings warnings cycle has been very calm to date but that could
change at any moment. Remember, the biggest surprises occur when
you are not expecting them.
Sell Too Soon!
Jim Brown
Editor@OptionInvestor.com
********************
INDEX TRADER SUMMARY
********************
Winding Up For The Ramp?
I cruised literally hundreds of stock, index and sector charts
today. Bottom line? Very mixed picture right now... technology
seems poised to pop while many of the extended charts appear very
tired.
(Weekly/Daily Charts: SWH)
I'll show you where my money to the long side would go right now,
in ascending order. In third place comes the SWH Software HOLDR
with stochastic values bullish and price action resting on channel
line support from mid-February. I do not like the overhead
congestion of 50 & 200 DMAs at the 43.60 area, but long near 43.00
and stop just below the channel at 42.50 area might work on a
quarter-end window dressing event.
(Weekly/Daily Charts: QQQ)
The NDX/QQQ has more upside room to breathe, so it takes second
place in the battle of tech sectors tonight. Bullish stochastic
values and an inside day posted on Tuesday's session. I'd buy
37.50 and place a tight stop on shares at 37.25, keeping long
above and flat below. Options would be long 37.50 and stop at
36.50 or 37.00 with an upside target to at least 38.60 and then
39.00+ if it manages to break higher from there.
(Weekly/Daily Charts: SMH)
First choice for me would be the SMH Semi-Conductor HOLDR. Looks
like the Bubbleonians are deluded enough to think some of these
components should trade multiples higher than my body weight after
a long winter of insufficient exercise, and bless them for it.
We'll play the upside on their fiscal insanity and downside when
reality hits and the mass exodus to exit eventually arrives. I'd
be long from 47.50 the call options or shares and look for 50 or
higher to be reached as mutual funds dress their windows with
fleece next week.
Summation
I'm neither a bull nor bear... I'm a trader. Either partisan side
will lose over time, but not when we readily play both. I hold a
fair number of May put options bought on every hit of resistance
and will continue to add and/or roll out to June, July etc as
indexes rise higher. I'll also play the upside when charts align
in that favor as well using April call options as required. If the
rally never looks back and takes us to new market highs, we get
rich on the calls. If it rolls over this summer and posts yearly
highs this spring, we get rich on the puts instead. If it pops up
& down we make money both ways.
How can we not love capitalism and our ability to trade both ways?
Best Trading Wishes,
Austin P
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****************
MARKET SENTIMENT
****************
More On The VIX
By Eric Utley
The themes that we've been focusing on continued into Tuesday's
trading. Fear measures fell lower while Bullish Percent data
ticked higher. The Nasdaq-100 Bullish Percent ($BPNDX) did
shed two stocks Tuesday, but other measures remained flat or
slightly increased.
The weekend piece concerning the CBOE Market Volatility Index
(VIX.X) sparked a lot of questions and criticism. Several
readers suggested that the VIX could be establishing a new,
lower trading range in which volatility remains low. Others
pointed out the low levels of the VIX prior to the go-go years,
which in a way supported the first thesis.
I acknowledge that the VIX could be slipping into a lower
trading range. That's certainly a possibility. Anything is
possible in the market. But recent history -- the last five
years, or so -- suggests that relatively low levels of
complacency lead to extended weakness in stocks. Until
proven otherwise, that's what I'm operating with when using
the VIX.
Away from the VIX, other indicators point to complacency, or
call it confidence, maybe even greed. The Total and Equity
Only put/call ratios are trading at low levels. The one
thing to keep in mind concerning the ratios is that we're
coming off of a triple witch, which may temporarily
artificially impact the numbers. With that said, the ratios
show a lot more calls trading than puts. Plus the Bullish
Percent data remains high, with major averages near key
resistance levels, such as the S&P 500 (SPX.X) at 1175.
With all of the aforementioned indicators, however, we have
to remember that psychology can trump all else in the short-
term, but not indefinitely. If the buyers are willing to
buy, they'll do so regardless of where the VIX is trading.
The Fed's shift to a neutral bias didn't derail the bulls'
enthusiasm over the recovering economy. Whether or not
profits follow remain to be seen in the next quarter.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 11350
52-week Low : 8062
Current : 10635
Moving Averages:
(Simple)
10-dma: 10575
50-dma: 10059
200-dma: 10002
S&P 500 ($SPX)
52-week High: 1316
52-week Low : 945
Current : 1170
Moving Averages:
(Simple)
10-dma: 1163
50-dma: 1128
200-dma: 1146
Nasdaq-100 ($NDX)
52-week High: 2071
52-week Low : 1089
Current : 1505
Moving Averages:
(Simple)
10-dma: 1513
50-dma: 1505
200-dma: 1550
Box Makers ($BMX)
The BMX earned the day's best performing sector spot with its
1.99 percent gain, edging out the Brokers' (XBD.X) 1.88 percent
gain.
The market's reaction to the Hewlett/Compaq news certainly
impacted the sector. Compaq (NYSE:CPQ) was the best performing
component with its 7.52 percent ramp. Other performers
included Veritas (NASDAQ:VRTS), Gateway (NYSE:GTW), Sony
(NYSE:SNE), and Dell (NASDAQ:DELL).
52-week High: 146
52-week Low : 74
Current : 107
Moving Averages:
(Simple)
10-dma: 107
50-dma: 104
200-dma: 106
Airlines ($XAL)
The XAL was the poorest performing sector in Tuesday's session.
The index lost 3.89 percent. Delta (NYSE:DAL) said that it
expected to post a loss of about $365 million during its first
quarter.
Movers to the downside included Continental (NYSE:CAL),
America West (NYSE:AWA), United (NYSE:UAL), Southwest (NYSE:LUV),
and Delta.
52-week High: 153
52-week Low : 59
Current : 106
Moving Averages:
(Simple)
10-dma: 110
50-dma: 96
200-dma: 104
-----------------------------------------------------------------
Market Volatility
The VIX continued to a new relative low in Tuesday's session,
but did not fall below the magical 20.00 level.
Meanwhile, the VXN traced another low, but managed to close
fractionally higher. The Nasdaq-100 (NDX.X) closed
fractionally lower.
CBOE Market Volatility Index (VIX) - 20.35 -0.40
Nasdaq-100 Volatility Index (VXN) - 38.99 +0.24
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.65 512,853 332,062
Equity Only 0.57 459,729 262,182
OEX 1.60 5,105 8,160
QQQ 0.33 18,466 6,117
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 63 + 0 Bull Confirmed
NASDAQ-100 69 - 2 Bull Confirmed
DOW 77 + 0 Bull Confirmed
S&P 500 77 + 0 Bull Confirmed
S&P 100 78 + 0 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.16
10-Day Arms Index 1.00
21-Day Arms Index 1.08
55-Day Arms Index 1.23
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
Advancers Decliners
NYSE 1707 1421
NASDAQ 1827 1710
New Highs New Lows
NYSE 253 28
NASDAQ 168 27
Volume (in millions)
NYSE 1,481
NASDAQ 1,683
-----------------------------------------------------------------
Commitments Of Traders Report: 03/12/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Attention!! Commercial traders continued to build their net
bearish position while small traders reached an extreme
bullish position.
Commercials Long Short Net % Of OI
02/26/02 366,258 432,258 (66,000) (8.3%)
03/05/02 361,254 445,989 (84,735) (10.5%)
03/12/02 396,050 483,606 (87,556) (9.9%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
02/26/02 139,183 62,087 77,096 38.3%
03/05/02 161,711 60,941 100,770 45.3%
03/12/02 179,825 75,025 104,800 42.6%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 104,800 - 3/05/02
NASDAQ-100
Nasdaq commercial traders added a number of short positions for
a big increase in the group's net bearish position. Meanwhile,
small traders grew slightly more bullish.
Commercials Long Short Net % of OI
02/26/02 33,589 34,091 (502) (0.7%)
03/05/02 33,549 35,419 (1,870) (2.7%)
03/12/02 37,415 42,942 (5,527) (6.9%)
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 7,774 - 12/21/01
Small Traders Long Short Net % of OI
02/26/02 9,517 11,416 (1,899) (9.1%)
03/05/02 11,961 11,214 747 3.2%
03/12/02 14,571 13,045 1,526 5.5%
Most bearish reading of the year: (9,877) - 12/21/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Dow Jones commercial traders dropped both long and short
positions, while maintaining their net bullish position.
Small traders dropped a number of longs and added a small number
of shorts of an increase in their net bearish position.
Commercials Long Short Net % of OI
02/26/02 33,322 21,110 12,212 22.4%
03/05/02 37,036 25,554 11,482 18.3%
03/12/02 35,080 23,204 11,876 20.4%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
02/26/02 6,333 12,547 (6,214) (32.9%)
03/05/02 6,589 13,057 (6,468) (32.9%)
03/12/02 6,400 13,070 (6,670) (34.3%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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***********************
INDEX TRADER GAME PLANS
***********************
Index Trader Swing-Trade Game Plan: Tuesday 03/19/2002
-------------------------------------------------------------
More Noise
News & Notes:
-------------
Markets have been coiling sideways for many days now, but in
rather volatile fashion. Intraday noise is almost tradable but
easier to lose money than make it with options right now. That may
change real soon.
Featured Markets:
----------------
[60/30-Min Chart: OEX]
Chart signals are weak to sloppy but this wedge has propensity to
break higher & run, noting the flat tops and rising lows in the
hourly chart on left. Aggressive traders can get long on a bounce
from support (red line) while those waiting for a break can enter
calls on a break above the green line and likely move to 600 or
higher from there.
[60/30-Min Chart: SPX]
Same for the SPX. Calls at support near 1165 or break above 1175
would be the two entry points here for calls. Price action closed
right in the middle, but my guess is we go to new recent highs by
week's end.
[60/30-Min Chart: QQQ]
QQQs are resting right on channel support and inside a clear
wedge. I'd look for an upside break and get long above 37.50 but
beware a break below 37.00 that could usher in further selling.
Summation:
---------
Most technology sector charts look poised for an upside pop soon.
Very mixed picture and hard to read, but my GUESS based on looking
at too many charts today is we go higher from here for now.
Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected
based on volume, open interest and "Delta" values in that order.
Our preference is usually OTM contracts except for the last few
days of expiration when ATM or ITM contracts are preferred.
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on option contract price as noted.
*No entry targets listed mean the models are idle at that time.
New Play Targets:
----------------
QQQ DJX
Apr Calls: 38 (QQQ-DL) Apr Calls: 106 (DJV-DB)
Long: BREAK ABOVE none Long: BREAK ABOVE none
Stop: Break Below Stop: Break Below
Apr Puts: 37 (QQQ-PK) Apr Puts: 105 (DJV-PA)
Long: BREAK BELOW none Long: BREAK BELOW none
Stop: Break Above Stop: Break above
=====
OEX SPX
Apr Calls: 600 (OEY-DT) Apr Calls: 1175 (SPT-DO)
Long: BREAK ABOVE none Long: BREAK ABOVE none
Stop: Break Below Stop: Break Below
Apr Puts: 590 (OEB-PR) Apr Puts: 1150 (SPT-PJ)
Long: BREAK BELOW none Long: BREAK BELOW none
Stop: Break Above Stop: Break Above
Open Plays:
----------
None
Index Trader Sector-Trade Game Plan: Tuesday 03/19/2002
-------------------------------------------------------------
Expect The Expected
News & Notes:
-------------
The Fed moved to neutral bias and so did the markets. Up before the
news, down to test session lows a few times and then popped into the
closing bell in mixed fashion.
Featured Plays:
---------------
None
Summation:
----------
Ten new long entries listed for tonight. Weekly/Daily chart signals are
mixed across the spectrum. My overall feeling is price action will go
higher this week and probably into the end of this month, which reaches
us next week. Rallies are likely to be sector and stock specific going
forward, so we've tightened short-play stops and will search for clearly
bullish chart setups as they develop.
The entries logged below are considered elevated risk and probably of
short duration. Most sector charts are toppy and look ready to roll, but
those listed below appear poised for an upside pop ahead. Very tough
times right now where markets either explode higher in one day or chop
sideways the entire week on end.
Trade Management:
-----------------
Entry triggers are points where plays are tracked when price action
breaks above for calls or below for puts. Stops are the exact opposite
of that. Sell targets are points to exit based on index levels or %gain
on share price as noted.
No entry targets listed mean the model is idle at that time.
** Asterisk means symbol has listed options as well
New Play Targets:
-----------------
Long
BHH ** IIH **
Long: 4.50 Long: 5.40
Stop: 4.00 Stop: 5.00
IYV IAH **
Long: 13.60 Long: 34.60
Stop: 12.90 Stop: 33.00
QQQ ** SWH **
Long: 37.50 Long: 43.00
Stop: 36.50 Stop: 41.00
SMH ** IYW
Long: 47.50 Long: 50.75
Stop: 46.00 Stop: 48.00
EKH ** IDU
Long: 63.25 Long: 64.50
Stop: 61.00 Stop: 62.00
Open Long Plays:
----------------
None
Open Short Plays
----------------
XLB ** XLP **
Short: 23.75 Short: 26.00
Stop: 24.50 Stop: 26.75
XLV ** XLY **
Short: 29.00 Short: 29.90
Stop: 30.25 Stop: 31.00
IYD IYK
Short: 45.25 Short: 45.90
Stop: 47.00 Stop: 47.00
IYR UTH **
Short: 84.75 Short: 93.25
Stop: 86.00 Stop: 95.00
RTH ** PPH **
Short: 98.00 Short: 98.75
Stop: 102.00 Stop: 100.00
DIA **[DJX] IYM
Short: 105.90 Short: 42.00
Stop: 107.00 Stop: 43.00
IYE
Short: 49.70
Stop: 52.00
IJJ
Short: 97.00
Stop: 99.00
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BROKERS CORNER
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Blackjack Trading
I recently went to the Beau Rivage for a short vacation. While I
was there I ate, slept, laid out at the pool, and of course
gambled. I play blackjack and craps. The reason I am writing
about my trip is not to tell you about the resort but to tie in
similarities of gambling and investing. The question has been
raised by many uninformed people “Is option trading like
gambling?” Don’t fret; I am not going to tell you that options
are like gambling. In fact, I am probably the one of the biggest
advocates in favor of options.
The first day in Biloxi was like a day of the FOMC meeting. I
didn’t play until the last thirty minutes of the day. Instead, I
played horrible golf and saved my money for better conditions.
If you have been to a casino, you know that losing a big chunk of
your money the first day is no fun. When in doubt, stay out.
The first night I learned the biggest lesson of thew whole trip.
In fact, it was this night that I realized the similarities
between gambling and trading. I sat down and got all the right
cards. So I buy in for at a blackjack table and in a short time
I am up 250%. I had a gut feeling that I should get up. In
fact, I even told my dad that I was up a lot and should go.
Stupid me kept playing because I got greedy. I gave back $250 in
5 minutes and called it quits. The lessons I learned are; take
you money and run, don’t get greedy, and the free drinks aren’t
really free. So I still went to bed a winner.
Day two I started out losing. By noon I lost a lot. My problem
was that even though I realized that the cards were bad, and my
stack of chips was shrinking, I wouldn’t get up. When I would
get back to even I wouldn’t get up. Anyone who knows about
gambling knows that if you break even you are doing really well.
Similarly, an option position can be identified as bad if upon
initiating if it immediately drops or goes down and back to even.
Jim has made a great analogy for this type of position with the
bus ride. If the position is dropping or even hovering around
even territory, exit it and initiate a new position. The idea is
that if that bus isn’t on the right route, then you need to
change buses. Furthermore, if the bus is about to go over a
cliff, jump out the window. A few broken bones (dollars) are not
as bad as death (broke). In addition, if the position goes down
and back to breakeven territory, reanalyze the position because
it may not stay at even for long. I actually had this happen
where the position went up enough to cover the spread and a
little slippage. I tried to get in between the spread with no
result. So I realized the struggle the position was having going
higher (the volume, intraday momentum and trend, support and
resistance) and lowered the selling price to breakeven less
slippage. The underlying security then dropped to 66.125 from
78.625 in a week.
So day three started out to be good because at one time I got
back to even for the trip. But I was foolish and stayed on that
“Bus” and lost even more. So I stopped playing until later that
night and went to work. I analyzed the process and the trends
just like the market and found a game plan that worked great. I
determined that I was most successful in the market when I would
take many small gains on different positions instead of playing
the long-term trend. The long-term trend refers to all the ups
and downs your option premium makes over a few months. It is
also the times trader’s leaps are profitable and traders don’t
take the profit because they have all of this Time and the
security is speculated to have this large move. I am sorry, but
in my opinion, this is wrong and greedy. Buy time for insurance
not because you plan on holding onto the position a long time.
Time is your foe. I will get off my soapbox by saying that I
found that more success at the tables when I would sit down with
my plan, stop losses, and profit targets. I also applied
trailing stops. I probably got up too soon a couple of times,
but that is just like “sell too soon” and “you can never go broke
taking profits.” The story ends happily with me jumping from one
table (position) to the next until I made back all I lost plus a
little extra in just an hour and a half. In review, change
positions if it is struggling to stay even or it is dropping
(stops), take small profits on positions with some time ‘til
expiration, and don’t get greedy with your profits hoping for
more. As with trading, don’t buy in (invest) with your whole
bankroll (assets) at one table (position). Diversify your assets
and trade with your speculative money that you can afford to
lose. The answer the question “Is option trading like gambling?”
is determined by each reader’s trading conduct. On a final note,
there are three ways to lose money in the market (casinos): hope,
fear and greed! Good trading to all.
Robert John Ogilvie
ROgilvie@gunnallen.com
Neither GunnAllen Financial, Inc. nor Robert J. Ogilvie makes any
representation as to the accuracy, reliability or completeness of any
charts, formulas, and /or research opinions presented herein. This
article is intended solely for educational purposes. Nothing herein
should be construed as an offer or solicitation to buy or sell any
securities. GunnAllen Financial is a Member of the NASD and SIPC. Please
read the OptionInvestor.com’s Disclaimer.
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The Option Investor Newsletter Tuesday 03-19-2002
Copyright 2001, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
DCN $21.61 +0.16 (-0.29) DCN appears that it could slip into
profit taking mode, consolidating its recent big rally up
from the $14 level. As options traders, we need to be on the
lookout for sideways trading that could erode time premium.
While DCN could continue higher on a breakout in the Dow Jones
Industrial Average ($INDU), we're cautious about the prospects
for sideways trading from here. Traders with open positions
can look to book gains on strength above the $22 level in the
coming sessions.
PUTS:
*****
None
***********************************************************
DAILY RESULTS
***********************************************************
Please view this in COURIER 10 font for alignment
*************************************************
CALLS Mon Tue
ACS 56.00 3.71 -0.75 Profit taking after big run Monday
BAC 68.86 -0.37 0.05 Banks still trading very strongly
DCN 21.61 -0.45 0.16 Dropped, consolidating recent rally
SYMC 42.40 0.57 0.37 Broke above $43, but didn't follow
IDPH 70.34 1.03 -0.62 New relative high, strong biotech
CEPH 67.84 0.83 -0.36 Still trending higher, overbought?
GENZ 50.54 0.91 -0.38 Fell just short of the 200-dma
COF 63.81 0.43 1.33 Leading the financials higher
KSS 70.46 0.40 -1.29 Pullback following breakout, entry?
EOG 40.77 0.53 0.89 New, big breakout above $40 level
PUTS
CTX 57.11 -1.73 0.95
EMLX 28.46 -1.34 1.92
NVDA 51.65 0.00 -1.12 Looking for the test of the 200-dma
RYL 88.42 -1.63 1.35 Relief rally following the FOMC
CCMP 66.27 2.22 -0.58 Having trouble with 10- and 50-dmas
ISSX 28.00 0.34 -0.55 Inside day, consolidating pullback
XAU.X 64.57 2.86 -0.21 Short covering on Japanese buying
MIL 44.82 -0.41 -1.24 New, breakdown from consolidation
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********************
PLAY UPDATES - CALLS
********************
IDPH $70.34 -0.62 (+0.41) IDPH stopped just short of the lower
end of its overhead resistance range at the $72 level in today's
session. Its pullback, along with the AMEX Biotechnology
Sector Index (BTK.X), in today's session followed another
strong day yesterday, which saw IDPH firmly move above the $70
level. Given the strength in the BTK.X recently, the sector
along with IDPH may be due for a profit taking pullback over
the next several days. While the trend could continue, we need
to be on the lookout for weakness induced by profit taking.
Traders need to raise stops on open positions to protect against
any potential downside in the coming sessions. If, on the
other hand, the trend continues, look for IDPH to trade above
the $72 level in the coming days. Our preferred entry at
current levels would be to look to intraday weakness as a
chance to enter IDPH on a pullback. Whatever may take place
in the coming days, keep a close eye on the BTK.X for insights
into IDPH's price action. IDPH is still one of the stronger
stocks in the group, but it may not be able to buck sector
weakness if the BTK.X pulls back.
SYMC $42.40 +0.37 (+0.94) Network Associates acquisition of
the remaining shares that it didn't already own in anti
virus software company McAfee.com didn't inspire the buyers
in SYMC yesterday morning. The stock instead spent the day
edging higher towards the $43 level, which it finally got
above in today's session. We didn't see the kind of follow
through we were expecting on the breakout, but the market
wasn't necessarily supporting breakouts in the technology
sector today. However, we were looking for SYMC to trade
above $43 and now must manage positions from here. In
tomorrow's session, we're looking for strength in the broader
Software Sector (GSO.X) to inspire the buyers in SYMC. We
could start to see some nervous shorts cover their bearish
positions if the technology and GSO.X sectors start moving
higher. We especially like SYMC in an advancing market
because it's one of the strongest tech stocks. The only
major variable is how the Nasdaq and GSO.X trade in the coming
days. With the Fed meeting behind, the bulls could return to
stocks and carry the market higher. Look for SYMC to lead the
charge in a bullish market. Intraday weakness down to the
$42 level could be used as entry points, or a rebound above
the $43 level.
CEPH $67.84 -0.36 (+0.47) CEPH continued along its path of
higher relative highs and higher relative lows in yesterday's
session. The stock repeated that pattern in today's session
before giving some of its earlier gains back going into the
close of trading following the Federal Reserve's announcement
on interest rates. The stock remains very strong within the
biotech sector (BTK.X), but could be due for a bit of a
pullback if the sector continues pulling back. The BTK.X
finished about 1% lower in today's session, bucking the trend
in the Nasdaq Composite (COMPX). Traders waiting on the
sidelines for an entry point can look for a pullback in the
coming days to the converged 10-dma and 50-dma down around the
$65 level. We've raised our stop to the $64.25 level, just
below the support level at $65 we're targeting for new
entries on a profit taking pullback. Look for volume to
decline on the way back down as a sign that the selling is
profit taking related. A pullback and rebound from the $65
level could lead to an ultimate breakout above the $70 level
overhead.
COF $63.81 +1.33 (+1.76) COF continued to trade higher early
this week, setting a new six month high along the way. Recent
intraday weakness has proved to be solid entry points as the
bulls continue to carry this stock higher. The trading in the
broader financial measures is helping too. The Bank Sector
Index (BKX.X) and the AMEX Securities Broker and Dealer (XBD.X)
sectors both fared well in today's session despite the Fed's
shift to a neutral bias. The strength in those two sectors is
certainly adding to COF's momentum. Continue to look to the
BXK.X and XBD.X to carry COF higher in the coming sessions. As
for new entry points, in a rising market and financial sector
environment, look for COF to breakout above the $65 level. Such
a move should allow the stock to retest relative highs up
between the $66 and $67 levels. Those favoring a pullback
before entering new plays can look for weakness back down
between the $60 and $61 support range. That area was once
resistance, but should serve as support on the way back down.
Plus the 10-dma sits in that general area currently at the
$60.34 level.
KSS $70.46 -1.29 (-0.89) Kohl's issued a spot secondary
offering of 3.5 million shares Tuesday morning. The deal was
priced at $71. The news caused KSS to gap lower this morning.
The stock finished almost 2% lower in today's session despite
the fractional gain in the Retail Sector Index (RLX.X). With
the secondary offering now behind, the stock could be set up
for a quick rebound if the RLX.X continues higher in tomorrow's
session. Traders looking for a quick entry point can use an
advance back above the $71 level as early as tomorrow so long
as the RLX.X and broader market are supporting such a move.
Those who would rather wait for further weakness before entering
new call plays can look for a trade back down into the $69
area in the coming days. We'll be watching for volume to
remain relatively light on any further weakness in price as a
sign of routine profit taking. KSS may need another day or two
of rest before significantly breaking out of its trading range
and moving above the $72 level.
ACS $56.00 -0.75 (+2.96) Relative strength and a bullish chart
pattern (ascending pennant) put us in the right place to benefit
from yesterday's upgrade of ACS by SG Cowen. The firm upped
their rating from Buy to Strong Buy before the open on Monday and
that was all the convincing buyers needed, as they pushed the
stock through resistance at $54.75 and the ascent continued from
there. By the time the closing bell rang, ACS had tacked on a 7%
gain on heavy volume. That allowed us to cinch our stop up to
$54.50, just below support (prior resistance). Tuesday's profit
taking was to be expected after Monday's sharp rise, and now we
wait for a bit of consolidation near support to give us a fresh
entry into the play. Target an intraday bounce near $55.50 or
$54.50 for fresh entries, but keep those stops in place.
BAC $68.86 +0.05 (-0.32) After the strong bullish action in
Banking stocks late last week, it was really no surprise to see
the BIX index trade in a narrow range over the past 2 days,
especially in light of the pending FOMC meeting. Now that the
interest rate expectations are actually news and there were no
unpleasant surprises, the sector should be finding fresh support
from buyers. The move to a new closing high on Tuesday was
certainly encouraging. Note that our BAC play has been moving
with the BIX, finding intraday support near $68.50, with further
support down at $67. Use an intraday dip and bounce near these
levels to initiate new positions ahead of the next move up. As
long as the broader sector continues to perform well, BAC should
continue to work its way higher. Our stop is currently set at
$66.75.
GENZ $50.54 -0.38 (+0.53) Biotechs are looking stronger by the
day, and the group got a nice boost on Monday following the
announcement from Cell Pathways that its experimental cancer
treatment produced promising results in early stage animal
testing. We've heard this type of news before, but it was enough
to get the bulls in a buying mood and they pushed the BTK index
to close at its highest level since late January. Given the fact
that the BTK closed above both the 200-dma and the 50%
retracement of the December-early February decline, it was no
surprise to see a bit of profit taking on Tuesday. Things were
looking really solid for our GENZ play all day on Monday and
right up to the FOMC announcement this afternoon, and then the
stock succumbed to a bit of profit taking. Coming right back to
intraday support near $50, GENZ looks like it may be setting up
for the next bullish entry point. Use a rebound from the $50
level or even further back near the $48-49 support level for
initiating new positions, keeping stops in place at $47. As long
as the BTK index remains in its bullish trend, the dips remain
buyable. Just make sure to wait for the bounce to commence
before entering.
**************
NEW CALL PLAYS
**************
EOG – EOG Resources, Inc. $40.77 +0.89 (+1.52 this week)
EOG Resources explores for, develops, produces and markets
natural gas and crude oil primarily in producing basins in the
United States, as well as in Canada and Trinidad. EOG's
operations are all natural gas and crude oil exploration and
production related. The company's North American operations
are divided into eight autonomous divisions, organized by
geographical region; Midland, Texas; Denver Colorado; Tyler
Texas; Corpus Christi, Texas; Mid-Continent; Pittsburgh,
Pennsylvania; Calgary Canada and the Houston, Texas/Offshore
Division.
After falling for much of the past year, Natural Gas stocks as
measured by the XNG index are finally on the rise again, having
put in what looks to be a solid bottom near $160 in early
February. Since then, the XNG has rallied to the $192 level on
improving prices for Natural gas and after consolidating in a
tight sideways pattern for the past 2 weeks, broke out again.
The past two days have seen some solid action in the XNG index,
leaving behind the $192 resistance level on Monday and the
200-dma ($193.70) on Tuesday. We went looking for solid plays
in the sector and up came EOG. Not only has the stock been
outperforming the XNG over the past couple months, but it just
broke out above the $40 resistance level. That painted a
quadruple-top breakout on the PnF chart, which is now giving us
a bullish price target of $59. Seeing as that is above the
stock's all-time highs posted in late 2000, it will likely take
awhile to get there. But it is hard to argue with a bullish
breakout in both a stock and sector at the same time. We're
looking to jump aboard this train on a pullback to support in
the $39.50-40.00 area. Given the fact that daily Stochastics
just completed a short-cycle bullish reversal, we're even
willing to initiate new positions on a push through the $41
resistance level. Monitor both the XNG index and the price of
the Natural Gas futures (NG02M for the June contract) to make
sure that the environment still remains bullish before playing.
We're initiating the play with our stop set at $38.
BUY CALL APR-40*EOG-DH OI=1422 at $2.10 SL=1.00
BUY CALL APR-45 EOG-DI OI= 252 at $0.40 SL=0.00
BUY CALL JUL-40 EOG-GH OI=2857 at $3.80 SL=2.25
BUY CALL JUL-45 EOG-GI OI= 706 at $1.70 SL=0.75
Average Daily Volume = 1.06 mln
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*******************
PLAY UPDATES - PUTS
*******************
XAU.X $64.57 -0.21 (+2.65) Recent trader talk and inventory
data reveal buying of physical gold. That much was reflected
in the price of gold in yesterday's session when the metal
rallied by more than $2. The metal finished fractionally
higher again in today's session. But today, the XAU.X began
to diverge from the metal. The rally in the XAU.X Monday
that followed the price of gold higher took the XAU.X up to
its recent downward channel. The index failed to breakout
above the $65.50 to $66 level in today's session, instead
rolling over following the Fed's announcement on interest
rates. Even though the XAU.X traded above our stop on an
intraday basis, we're holding to see if the rollover turns
into another trip down to relative lows. Entries taken
around current levels can be managed with tight stops just
above between $65 and $66. To the downside, we'll target
the $60 area depending on risk tolerance and time frames.
Watch the price of gold (gc02j) as an indicator for the
direction of the XAU.X.
CCMP $66.27 -0.58 (+1.64) After such a sharp fall, shares of
CCMP were due for a bit of a bounce, and that's just what we
saw on Friday and Monday, as the stock saw a bit of buying,
along with the Semiconductor index (SOX.X). But on Tuesday,
CCMP started to show its relative weakness again, posting a
fractional loss, even though the SOX rose again. Even though
the SOX is starting to show signs of life, it is finding some
resistance near the $615 level. If the SOX rolls over again,
CCMP should lead the charge to the downside once again. Note
that intraday resistance is building again near the $67.50 level,
which just happens to be the location of our stop. The rollover
that began this afternoon could have been another good entry
point, but in the absence of volume, we'd prefer to see another
rejection from resistance or a drop below the $65.50 level before
opening new positions. Momentum traders will want to focus on
the $63 level, as a drop below there (recent support) will set
CCMP up to retest its 62% retracement near $60.
CTX $57.11 +0.95 (-0.78) Traders in the housing stocks appear to
have breathed a collective sigh of relief, now that the outcome
of the FOMC meeting is known. While there were no surprises,
the potential existed and that could have contributed to the
weakness in the DJ US Home Construction index (DJUSHB) over the
past week. But the bigger picture shows the long term picture
for this sector of the market turning long-term bearish. We're
viewing the rebound in the sector on Tuesday as a bit of profit
taking and are looking at it as a setup for fresh bearish entries
in our play on CTX. The stock has been giving up strength
relative to the DJUSHB for the past few months and now that the
sector is weakening, that should only serve to hasten CTX's
decline. It was notable on Tuesday, that CTX retreated from
resistance at $58.25, also the site of the rounding 20-dma. A
rollover from this level is already in progress and another
rejection at resistance would provide for fresh entry points.
Alternatively, wait for CTX to drop below the $55.50 level before
playing. Our stop remains at $59.
EMLX $28.46 +1.92 (+0.58) Bullish traders in EMLX finally
rejoiced on Tuesday, as the stock managed to catch a bit of an
oversold bounce near the $26.50 level, but it takes more than a
day to change a trend. Note that EMLX had a similarly positive
day a week ago, before going on a 4-day 16% slide. We're looking
for a repeat performance, and once the $26 support level gives
way, EMLX should make rapid strides downwards to its next likely
resting point, $19-20. The difference between the rebound a week
ago and today's action is that today EMLX ended just below its
high of the day and the bounce came on much stronger volume. So
bears need to keep their stops in place. Ours is currently
resting at $28.75 and a close above that resistance level will
tell us that a near-term bottom is in place and it will be time
to move on. But a failure of the current rebound near that level
would set us up to initiate new positions on the failure.
ISSX $28.00 -0.55 (-0.20) Despite a marginally positive NASDAQ
so far this week, Internet Security stocks are still on the
defensive and have been unable to mount anything approaching a
rally. The past 3 days have seen bullish traders in ISSX turned
back at successively lower highs, with Tuesday's benchmark only
reaching the $28.70 level. Shares of VRSN tried to mount an
afternoon rally, only to be turned back right at resistance by a
wave of selling in the final hour of trade. This is the
environment in which ISSX is trying to find support, and right
now, it appears destined to fail. We'd like to get an intraday
rebound to the $29.50-30.00 resistance level to initiate new
positions, but it looks like we may have to settle for taking the
next failure below the $29 level. Traders looking for
confirmation before playing will want to watch for a breakdown
below the $27.50 support level. Further support then comes in
between $25-26 and then at $23. Both of these levels will
provide the bulls with an opportunity to attempt to rally and the
bears the ability to squelch that rally. For now, enter on
failed rallies and harvest profits when buying begins to appear
near support. Lower stops to $31.25.
NVDA $51.65 -1.12 (-1.12) NVDA's relative strength chart as
compared to the Semiconductor index (SOX.X) has been in a
continual state of decline since late January and that trend
doesn't appear likely to change anytime soon. So even though
the SOX has managed a slight rebound over the past few days, NVDA
is not participating and is once again nearing the $50 support
level that has held up 3 times over the past month. Will the
fourth test be the one that sees support give way? Only time
will tell, but we think so. Each rebound is getting weaker, and
the most recent one only lifted NVDA to the declining 20-dma
before the stock once again rolled over. Our stop remains at
$54.50, and we would consider any failed rally below that level
(ideally at $52.75, but possibly as high as $54) to be another
attractive entry point. Alternatively, traders will want to wait
for the $50 support level to give way before initiating new
positions. Monitor the SOX for sector strength/weakness before
playing. Also, beware of a bounce from the $48.25 level, as this
is the site of both the 50% retracement and the 200-dma
RYL $88.42 +1.35 (-0.28) RYL is our version of "doubling down" on
the Housing sector, as we are getting good results from our CTX
play. Both stocks have been weakening relative to the Housing
sector ($DJUSHB) over the past couple months and now that the
sector appears to be topping out, that is adding even more
bearish pressure on these stocks. RYL declined for the latter
half of last week and continued its losing ways right into
Monday's session, before finally finding some support near $86.
That rebound carried into Tuesday's session, and it appears that
the bulls were relieved to hear the outcome of the FOMC meeting,
as they actually pushed the stock a bit higher going into the
close. But this looks like the setup for a failed rally and we
want to be ready to pounce when the failure occurs. Look to
initiate new positions as RYL rolls over from intraday resistance
near $89.50, or possibly as high as $90.25. We have ratcheted our
stop down to $90.50, as a move back above that resistance level
will indicate there is still some life in the stock and have us
moving to the sidelines for the time being. Traders that would
rather trade the breakdown, will want to wait for the $86 support
level to give way before opening new positions.
*************
NEW PUT PLAYS
*************
MIL - Milipore $44.82 -1.24 (-1.65 this week)
Millipore Corporation and its subsidiaries are engaged primarily
in the development, manufacture and sale of products that are
based on separations technology and are used for the analysis,
identification and purification of liquids and gases. Millipore
also generates revenues from the manufacture and sale of products
based on electromechanical and pressure differential technologies
to monitor and control critical aspects of the manufacturing
process for integrated circuits.
Investors frowned upon the recent spin-off of this company.
The market reacted in a most bearish fashion. Milipore
completed the distribution to shareholders of its electronics
division in late February, when the market punished the parent
stock for the decision. The bad news continued last week when
Thomas Weisel downgraded shares from a buy rating to an
attractive rating. Curiously, two days following the downgrade,
Milipore announced that it expected capital expenditures of
$80 to $85 million this year, higher than last year's total
spending of $72 million. That news reversed the two day
relief rally in the stock, which lead to a breakdown from the
recent consolidation. The stock has historical support below
current levels between $43 and $44. But below that support
area exists very little in the way of help until the $38
support level. Traders looking to enter plays into further
weakness can use a breakdown below the $44 level to take
entries in new put plays. Those who prefer more confirmation
can look for a decline below $44 which would have the bears
on alert. From that alert, traders can look for confirmation
on a decline below the $43 level. That move would give the
green light to pursue bearish positions on further weakness
from current levels. If the stock stages another relief
rally before taking out its support below current levels,
then bears can look for a light volume advance up above the
$46 level to the 10-dma, currently resting at the $46.46
level. A rollover from there would offer bears a low
risk entry into potentially high rewarding plays. We're
setting our coverage stop initially at the $47.50 level.
BUY PUT APR-50 MIL-PJ OI= 0 at $5.70 SL=4.00
BUY PUT APR-45 MIL-PI OI=10 at $2.10 SL=1.00
Average Daily Volume = 325 K
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**********
DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
**************************************************************
ADVERTISING INFORMATION
For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:
Contact Support

The Option Investor Newsletter Tuesday 03-19-2002
Copyright 2001, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
**********************
PLAY OF THE DAY - CALL
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SYMC - Symantec $42.40 +0.37 (+0.94 this week)
Symantec Corp. provides a broad range of content and network
security solutions to individuals and enterprises. The Company
is a provider of virus protection, firewall, virtual private
network (VPN), vulnerability management, intrusion detection,
remote management technologies and security services to
consumers and enterprises around the world. The Company
currently views its business in five operating segments: Consumer
Products, Enterprise Security, Enterprise Administration,
Services and Other.
Most Recent Update
Network Associates' acquisition of the remaining shares that it
didn't already own in anti virus software company McAfee.com
didn't inspire the buyers in SYMC yesterday morning. The stock
instead spent the day edging higher towards the $43 level, which
it finally got above in today's session. We didn't see the kind
of follow through we were expecting on the breakout, but the
market wasn't necessarily supporting breakouts in the technology
sector today. However, we were looking for SYMC to trade
above $43 and now must manage positions from here. In
tomorrow's session, we're looking for strength in the broader
Software Sector (GSO.X) to inspire the buyers in SYMC. We
could start to see some nervous shorts cover their bearish
positions if the technology and GSO.X sectors start moving
higher. We especially like SYMC in an advancing market
because it's one of the strongest tech stocks. The only
major variable is how the Nasdaq and GSO.X trade in the coming
days. With the Fed meeting behind, the bulls could return to
stocks and carry the market higher. Look for SYMC to lead the
charge in a bullish market. Intraday weakness down to the
$42 level could be used as entry points, or a rebound above
the $43 level.
Comments
With the $43 level penetrated, SYMC could move much higher in
the short term if the market cooperates. The stock should be
making the shorts nervous, who could begin to cover on strength
in the Software Sector Index (GSO.X) tomorrow. Look for signs
of strength in others such as Microsoft (NASDAQ:MSFT); watch
early strength in the GSO.X. Those developments should result
in SYMC popping higher. Use a run back above the $43 level for
an entry point.
BUY CALL APR-40 SYQ-DH OI=10931 at $3.90 SL=2.75
BUY CALL APR-42*SYQ-DV OI= 1713 at $2.35 SL=1.50
BUY CALL APR-45 SYQ-DI OI= 1910 at $1.25 SL=1.00
BUY CALL JUL-45 SYQ-GI OI= 622 at $3.90 SL=2.25
Average Daily Volume = 1.90 mln
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TRADERS CORNER
**************
Beat the Tax Man
Buzz Lynn
buzz@OptionInvestor.com
If you are with the IRS, don't read this. The fact is that for
most of us, it's that time of year again. Time to pay for the sin
of wages. What I'm going to share with you tonight is stuff the
IRS wishes we did not know. I only wish I'd figured it out before
New Year's Day 2002. I don't know about the rest of you, but
sleighing the "wash sale" rule is high on my "to-do" list. So
what? Lest we get complacent about paying taxes, I respectfully
submit the following lyrics from Taxman, the catchy Beatles tune
from over 35 (gasp!) years ago, as a friendly reminder that truth
is stranger than fiction.
"Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman, yeah, I'm the taxman
Should five per cent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman
If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold I'll tax the heat
If you take a walk, I'll tax your feet
Taxman!
'Cause I'm the taxman, yeah I'm the taxman
Don't ask me what I want it for (Aahh Mr. Wilson)
If you don't want to pay some more (Aahh Mr. Heath)
'Cause I'm the taxman, yeah, I'm the taxman
Now my advice for those who die
Declare the pennies on your eyes
'Cause I'm the taxman, yeah, I'm the taxman
And you're working for no one but me
Taxman!"
My thanks to Paul, John, George, and Ringo, but let's get back to
that wash sale issue. What is the wash sale rule? It's part of
the tax code that says you can't sell a loser, then immediately
repurchase it, and legally book it as a loss. In order to
recognize the loss, you must replace the sold stock outside of
either 30 days before or after the loss sale. Otherwise, the IRS
will consider it "a wash", hence the name wash sale and no tax
loss generated.
For instance, say you bought 500 shares of Corning (GLW) in
January of 2001 only to watch it sink like a stone to $7 in early
October 2001. While it might have rebounded to $10 by November or
December, that's still a $60 per share loss of $30,000. Problem
is that for the most part, unless you make at least 300 trades per
year (among other things) that constructively identify you as an
individual with "trader status", you will be limited to $3,000 in
capital losses per year. Everything will turn out great in only
10 years! Heck, if you lost $5 mln, life will be grand again in,
let's see, only 1667 years! So much for capital losses against
ordinary income. But we can use the GLW loss of $30,000 against
other capital gains if we have them and still keep the stock in
hopes that it will appreciate again. The idea is to get the
benefit of the loss and hold the stock for better days.
Yet that pesky wash rule keeps interfering. Your broker or
financial advisor will likely tell you that if you want that loss
to offset other gains, you have to roll the dice and pray that it
will not have rebounded by the 31st day, thus making repurchase
more expensive and defeating the purpose of taking the loss in the
first place.
We could also double up by buying another 500 shares 31 days
before the proposed tax loss sale and pray that it does not fall
further before we sell the original bundle of GLW.
Either way, our course of action becomes merely a riverboat
gamble. But there is another way. Remember, this strategy is
probably going to be timelier in the latter half of the year
rather than now. However, it can be employed anytime to take a
loss as long as the whole strategy takes place within one calendar
year.
Here's what we do. The first step is to double up. (What?!?!?!)
Yep, buy another slug of what ails you. Keeping with our GLW, we
would buy another 500 shares, paying $5,000 at $10 per share using
nice, round numbers. Then we hedge it with option trades by
buying puts and selling calls on half our shares.
Checking the calendar, we want to make sure we have at least 31
days prior to expiration. Otherwise we'd be killed by the wash
sale. So if the current date is say November 1st, we would have
picked December strikes that expired 51 days later. In fact, only
entering the trade before November 16 would have allowed us to
pull this off. Remember, this year, we'll have up until November
21st to pull it off in order to get our 31-day minimum.
On another note, if you are a high roller, you can request a quote
on a "Flex-Option" that will enable you to pick any strike price
down to the nickel to expire on any date of your choosing. It
doesn't have to be a $5 or $10 increment. Nor does it have to
expire on the third Friday of the month. We can also choose to
trade American or European settlement style. But in order to use
the Flex-Option, your minimum order needs to be 250 contracts on
both sides. Flex-Options are truly unique instruments. If you
want more info on them, it can be found on the CBOE site at
http://www.cboe.com/OptProd/understanding_products.asp#flex.
Unfortunately, if you don't already know what they are, you
probably can't use them. That's OK though. Regular options work
just great too.
So what options do we use to form our hedge? For our example,
right after buying the 500 additional shares, we will immediately
sell five DEC-10 call contracts and use the proceeds to buy five
DEC-10 put contracts. By doing this, we assure ourselves of a
500-share sale following the close of trading on December 21st no
matter which way the stock moved.
If GLW had moved to $8, we would have exercised our long put
option and "put" or sold the stock to the buyer, forcing him or
her to take it at $10, and getting back our $5,000 purchase price.
On the other hand, if GLW went to $12, we would have been called
out or sold the stock to the call option holder at $10, again
taking back our $5,000 purchase price.
Again, either way, we unload 500 shares of GLW at $10 after
December 21st by putting it to someone or by getting called out of
the shares. Thus we have met our object of selling stock at $10
and getting our $5000 back without gambling on drastic price moves
- all the while replacing the original GLW purchase with new
shares bought when we entered the options hedge at least 31 days
earlier. In the end, we book our $30,000 paper loss and we still
have 500 shares of GLW at $10.
All that said, I will throw in standard disclaimer language that
says I am not an accountant, or tax professional. Nor do I play
one on TV. Nobody should rely on my say-so and should seek advice
only from his/her own qualified tax professional. Break glass in
case of fire. Don't eat yellow snow. Feed a fever; starve a
cold. Etc.
Hopefully, for those of us that have suffered losses (yes, me
too), this might make a handy way to benefit from them rather than
having to eat them.
To the IRS folk still lurking on this page looking to close the
loophole, please do not go to Congress asking for "corrective
legislation" so that we traders may thus have one more shot at
making hay from this great wash sale avoidance trick. To those
contemplating its use in coming months, don't feel guilty about
using the strategy and consider it an act of financial self-
defense against the Tax Man.
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************
MARKET WATCH
************
Several stocks trigged action points in the last two days. Three
more candidates make it onto the list tonight.
To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/031902.asp
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MARKET POSTURE
**************
The trading range keeps the major averages within their ranges.
Few sectors move outside of trading ranges.
To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/031902_1.asp
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DISCLAIMER
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